After a decade of dearth there has finally been some welcome news for value investors, as a vaccine bounce – coupled with a calming of geopolitical tensions – has acted as a catalyst in a recovery for the unloved investment style.
Since the credit crunch, financial markets have been all about growth. In the past decade the MSCI World Growth index has returned 288 per cent, compared with 135 per cent for value, leading to talk of the latter’s investment style becoming obsolete.
The UK has been in the eye of the storm, but the region's tilt towards value-based sectors, coupled with Brexit uncertainty, has made it the ideal place to target a recovery play and this week’s best in class is exactly the sort of offering investors should consider.
Given the backdrop, it is amazing to think the ES River & Mercantile UK Recovery fund has consistently outperformed its peers in the past decade, returning 169 per cent compared to 96 per cent for the average fund in the IA UK All Companies sector.
Manager Hugh Sergeant has run this fund since its launch in 2008 and has worked in the industry for more than three decades.
Sergeant says there are numerous reasons for the fund's success. The first is that although the business's PVT (potential, value and timing) process loves value, it is also about potential opportunity and finding the right point (timing) to allocate capital.
He also points to the multi-cap nature of the fund, the decision not to get too aggressive after the EU referendum, and the diversified approach to investing (taking 10-20 basis point initial positions and building up slowly as positive news flow comes through) as other examples.
Seargent is looking for recovery stocks where good businesses are currently experiencing below-normal profit levels, which depress valuations. If they have the capabilities to help themselves out of this predicament, Seargent will take them on board. He says it is crucial to meet company management first to ensure they are the right people to set their company on a long-term recovery.
In addition to PVT, the company also has a quantitative process entitled MoneyPenny, which underpins all of the investment choices.
The philosophy looks to profit from companies at different stages in their life cycles. As a result, it categorises the potential investment universe into growth, quality, recovery and asset-backed opportunities. MoneyPenny systematically scores and ranks all UK companies on PVT within each of these four areas.
Alongside PVT, stock market cycle analysis provides a systematic framework for managing top-down portfolio construction opportunities and risks. This process influences both the sell and buy decision.
Essentially, Seargeant and the team bring together traditional finance theory with behavioural finance. Their back-testing data suggests stocks that score well in their multi-factor screens perform strongly in the future.
To minimise the risk of mistakes, the team runs the PVT screen on stocks weekly. It also carries out frequent updates on all holdings – if the original thesis is no longer valid, the investment will be sold.
The fund is typically quite diluted, holding around 150-200 stocks. This is to spread the exposure across different recovery sectors and their respective cycles, and also to reduce stock-specific risk. Seargent will typically avoid the consensus stocks, such as the so-called 'bond proxies', and instead target the sectors out of favour by the market due to cyclical or style reasons.
If the value run is here to stay, then Seargeant is the ideal person for the job, having demonstrated an exceptional track record. We also like that he looks to add to his holdings at almost fire-sale prices in volatile times, giving further scope for long-term capital growth.
It is an essential consideration for anyone looking for a UK value play.
Darius McDermott is managing director of FundCalibre
